A ground-breaking £35 billion fund set up by town hall pension schemes will be used to build thousands of new homes and help small businesses in Birmingham and other Midland cities.

The scheme, which is expected to win Government approval in the summer, involves West Midlands, Cheshire, Staffordshire, Shropshire, Worcestershire, Derbyshire, Nottingham and Leicestershire local government pension funds pooling assets for investment in infrastructure projects.

The fund, starting off at £35 billion, will be called Local Government Pension Scheme Central (LGPSC).

The idea mirrors a proposal put forward two years ago by John Clancy, now the leader of Birmingham city council, who argued that billions of pounds of assets in poor-returning council pension funds should be ploughed into house building and business investment.

He argued that new social housing, in particular, offered a rock-solid return for the pension funds through guaranteed rental streams from tenants.

In a book, The Secret Wealth Garden, Clancy revealed how the pension funds were paying hundreds of millions of pounds in fees for investment advice, but the returns on assets were often significantly below the market average.

Cllr Clancy, who has listed house building as one of the main priorities of his administration, has held talks with the chairman of the trustees of the West Midlands Local Government Pension Fund and is hopeful that firm investment plans can be unveiled before the end of the year.

Birmingham city council plans to build 2,000 new homes by the end of 2016 through its municipal housing trust, but Cllr Clancy wants to increase the target and is promising to build “aspirational, inspirational and sustainable” homes for thousands of families on the waiting list.

He said:

I am putting a lot of work into this and I am pleased to say Midland pension funds are very interested in the idea, in fact far more interested than I had anticipated.

I am delighted that LGPS Central is to be formed across the Midlands, pooling separate funds of the West Midlands, Cheshire, Staffordshire, Shropshire, Worcestershire, Derbyshire, Nottingham and Leicestershire.

I advocated precisely this in my book The Secret Wealth Garden in 2014. The Government picked up on this and invited pooling arrangements in 2015. These eight funds have now responded.

This LGPS Central Pool will initially see the creation of a multi-asset investment pool of £35 billion. It will undoubtedly improve investment performance for pension savers and significantly reduce costs.

I’d also like to see LGPS Central start to circulate investment across the Midlands, especially in housing, SMEs and infrastructure.

In a statement announcing the creation of the fund, the West Midlands Local Government Pension Scheme said:

Eight Local Government Pension Funds, all based in the Midlands, are pleased to announce their intention to create an investment pool. This will initially see the creation of a multi asset investment pool of £35 billion in size, meeting the scale sought by the Government in its investment pooling criteria for the Local Government Pension Scheme.

The collaboration will aim to deliver cost savings and to build on the individual participating Funds’ strong investment performances by providing scale, increased resilience, knowledge sharing and robust governance and decision making arrangements.

The new investment pool will offer access to both internal and external investment management. Individual participating Funds will continue to retain their separate identities and local accountability. The collaboration will offer an equal say in the oversight of the new entity to each participating Fund.

The participating Funds look forward to increased co-operation and collaboration in setting up the new investment pool and in working with the Local Government Pension Scheme more widely.

The value of the participating Funds’ portfolios as at March 31, 2015 totalled £35 billion. At the same date, the Funds’ membership stood at 850,000 and participating employers totalled 1,850.

Initial proposals to the Government on investment pooling were required by the end of this month. Finalised submissions are expected by July 15, 2016 to include joint proposals from those authorities participating in investment pools as well as submissions from each individual authority. The new pooling arrangements are expected to be set up by April 1, 2018.